A report that Treasury Secretary Henry Paulson is considering the formation of an entity like the Resolution Trust Corp. that was set up during the savings and loan crisis of the late 1980s and early 1990s left investors ebullient.
Excellent news, if it turns out to be true. I floated a somewhat similar idea in a recent post
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So we're bailing out the whole sector now. The mighty mighty government will shoulder all the bad debt. I guess that's great news for them. Can't wait to see the details of this genius plan.
If memory serves, J.K., the government made a profit on the original RTC.
The unofficial motto of the Infantry School at Ft. Benning comes to mind here: "Do something, even if it's wrong". The point of that motto is that if you are getting shelled, you can't get paralyzed into indecision worrying about perfection; you've got to deal with the situation before you get killed. I've been impressed with the calls of the old lineman Paulson so far.
I'm of the belief than in the markets, the only things that should be done by the government are actions that enhance transparency and honesty by participants. It looks like since the last RTC no one has learned anything, since we are here again! Or that they've learned they can count on their trusty government to clean up any mess they make. Plus I'm sure Ben and Paulson will have quite nice gigs lined up for them at the institutions they are helping now, when all of this is said and done.
Its a slippery slope, these sorts of actions. For instance the government might not be doing anything with its access to my personal information through unconstitutional eavesdropping now, but it sets a dangerous precedent. Likewise, it may feel good to have them run the dollar printing press now (I personally don't think it will feel good), but how far are you willing to let them go? Do we want them to be as involved in the markets as an autocratic nation? Where does the buck stop?
"It looks like since the last RTC no one has learned anything, since we are here again!"
Not exactly. A lot more banks went under during the last credit crises/real estate bust, and most banks didn't make the same mistakes this time around. The relatively few (non-investment) banks that got in trouble this time got there by making different mistakes.
In the 19th Century we had a lot less government participation in the economy and we had more frequent and severe banking crises that led to broad-based depressions. I'd rather avoid that even if it occasionally requires some pragmatic and imperfect government interventions.
Good quote by Ben Bernanke in today's NY Times: "There are no atheists in foxholes, and there are no ideologues in financial crises".
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